The relationship between the Solicitors Regulation Authority and the profession it regulates is under severe strain. Following the high-profile collapses of Axiom Ince, SSB Group and PM Law, alongside controversial and poorly received policy proposals, talk of a vote of no confidence in the regulator is gaining momentum.
While a vote of no confidence would be unprecedented, the frustration driving it has been building for some time. The profession is being asked to foot the bill for massive regulatory failures through significant increases to the Compensation Fund, while simultaneously facing new rules that suggest a basic misunderstanding of how law firms actually operate.
A fundamental disconnect
The recent controversy over the COLP and COFA roles perfectly illustrates this disconnect.
The SRA’s plans to restrict when managers with unilateral decision-making powers could also act as compliance officers caused immediate alarm, particularly among small and medium-sized practices. For many high street firms, requiring compliance responsibilities to sit separately from those management powers would mean significant changes to staffing and governance, without an obvious improvement in risk management.
While the SRA has sensibly pressed pause on the plans following industry backlash, the fact the proposal made it to consultation stage was revealing. It suggested a regulator overly focused on corporate governance theories rather than the commercial and operational realities of the legal sector.
When firms are dealing with the financial fallout of systemic failures like Axiom Ince, patience for this kind of structural micromanagement is virtually non-existent.
The political fallout of a formal vote
A vote of no confidence by the Law Society or the wider profession would not legally force the SRA’s leadership to resign or automatically change its regulatory powers. However, the political and reputational damage would be severe.
The Legal Services Board has already put the SRA into special measures, following its handling of the Axiom Ince collapse. A formal declaration of no confidence from the profession could amplify pressure from the LSB and the Ministry of Justice. It could easily trigger a wider independent review into the SRA’s competence, its funding model and its overall structure.
Ironically, a regulator losing the confidence of its profession fundamentally damages the public trust the SRA is tasked with protecting.
Focusing on the real risks
If the SRA wants to rebuild its relationship with law firms, it needs to shift its focus back to actual, systemic risks to public protection rather than theoretical compliance structures.
There are areas where the SRA is getting this right. The recent reform to accountant’s reports is a genuinely positive and uncontroversial step. When the SRA relaxed the mandatory filing requirements several years ago on the basis that only qualified reports held any risk intelligence value, it inadvertently removed a vital deterrent. Firms inclined to cut corners by putting off their client account audit were given the cover to do so, increasing the risk to client money.
Reinstating stricter, more consistent oversight of accountant reports makes sense. It targets a genuine risk, protects clients and gives compliant firms confidence that rogue practices will be caught earlier. This is what proportionate regulation looks like.
The problem with the interest debate
Contrast the sensible approach to accountant’s reports with the SRA’s current focus on client account interest, which they have vowed to revisit.
The regulator appears to view the retention of fair interest by law firms as a consumer protection issue, objectionable in principle, suggesting that clients are losing out. But this ignores the reality of why firms hold client money in the first place.
Holding client funds is not a mere profit-making scheme; it is a necessary facility for most residential conveyancing, probate and commercial transactions. It carries a heavy administrative burden. Firms bear the cost of banking fees, secure accounting software, annual audits, dedicated finance staff and significant regulatory risk.
Earning interest on the general client account helps subsidise the cost of providing this service. Yes, some firms may make a profit in times of higher interest rates (although if making a small profit from other people’s money is unethical in a capitalist economy, wait until they hear about the financial services sector…). But if the SRA effectively strips this revenue from firms, the unintended consequences are entirely predictable. The cost of legal services will have to rise to cover the shortfall. Smaller high street firms, already operating on tight margins, may be forced to close or stop offering services that require holding client money.
Ultimately, the clients will have to pay for the client account in other ways and it could seriously this reduce their choice of lawyer and access to justice. A policy designed in the name of consumer protection could end up harming the clients it intends to help.
Rebuilding the relationship
The SRA is at a crossroads. Effective regulation requires a degree of consensus and cooperation from the profession.
A vote of no confidence would reflect a genuine feeling that the regulator is looking in the wrong direction. To move forward, the SRA needs to demonstrate that it understands the commercial realities of running a law firm and focus its resources on preventing the next Axiom Ince, rather than policing the administrative structures of compliant firms.
JBL Compliance can help firms review their current arrangements and ensure their compliance framework is practical, proportionate and ready for regulatory scrutiny. Please contact us if you would like to discuss how these issues affect your practice.
